Thursday, June 21, 2018 Washington Room Ramkota Hotel Sioux Falls, South Dakota

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1 CLE CLE CLE CLE CLE CLE CLE CLE The State Bar of South Dakota & The Committee on Continuing Legal Education present Sarah Richardson Larson, Chair Thursday, June 21, 2018 Washington Room Ramkota Hotel Sioux Falls, South Dakota CLE CLE CLE CLE CLE CLE CLE CLE

2 The State Bar of South Dakota and The Committee on Continuing Legal Education Present: BUSINESS LAW CLE Chair Sarah Richardson Larson Davenport, Evans, Hurwitz & Smith, L.L.P.; Sioux Falls, SD June 21, 2018 Ramkota Hotel Sioux Falls, SD 8:15 11:45 a.m. 8:15 9:00 a.m. Registration Free to Active State Bar Members, Others; $100 8:15 9:00 a.m. You and Your Client: The Rules of Engagement and Disengagement Sheila S. Woodward Marlow, Woodward & Huff, Prof. LLC; Yankton, SD 9:00 9:45 a.m. What Title Companies Want Attorneys to Know Eric Hanson Dakota Homestead Title Insurance Company; Sioux Falls, SD 9:45 10:00 a.m. Break 10:00 10:45 a.m. The SOS on the POA: Don t Get Bit by the Wolf in Sheep s Clothing Bobbi L. Thury Legacy Law Firm, P.C.; Sioux Falls, SD 10:45 11:45 a.m Tax Act Update James M. Jarding, Jr. Eide Bailly, LLP; Sioux Falls, SD Register online at:

3 You and Your Client: The Rules of Engagement and Disengagement Sheila S. Woodward Marlow, Woodward & Huff, Prof. LLC; Yankton, SD Sheila handles the firm s estate planning, trusts, and probate practice. She also assists small businesses with start-up and post start-up issues, including the formation of corporations, limited liability partnerships, and limited liability companies. Sheila works with farmers and other land owners on real estate matters and assists with the firm s litigation matters. Sheila manages the firm s appellate practice and has argued before the South Dakota Supreme Court and the Eighth Circuit Court of Appeals on numerous occasions. After graduating from Augustana College in Sioux Falls, South Dakota in 1992, Sheila attended the University of Iowa College of Law, graduating with highest distinction in Sheila clerked for the Honorable Thomas M. Shanahan in the federal district court in Omaha, Nebraska for two years before joining the firm in She became a partner in Sheila and her husband Chris Sonne live in Yankton. Like her counterparts in the firm, Sheila is actively involved in the community, currently serving as Board Chair for both the Heartland Humane Society and Yankton Area Foundation. She also is a director for The Center and serves on the South Dakota Advisory Committee to the United States Civil Rights Commission. Previously, Sheila served on the boards for Big Friend/Little Friend, Yankton Women's/Children's Center, Lutheran Social Services of South Dakota, Lutheran Social Services of South Dakota Foundation, Yankton Area Arts Association, and Trinity Lutheran Church. In her spare time, Sheila enjoys coaching basketball for the Yankton Special Olympics, cooking, traveling, and cajoling her dogs to walk nicely on a leash. Sheila is the firm s best fantasy football player, Steve Huff s claims to the contrary notwithstanding.

4 The Rules of Engagement & Disengagement: Establishing & Terminating The Attorney/Client Relationship Sheila S. Woodward Marlow, Woodward & Huff, Prof. LLC 200 West Third St., Yankton, SD (605) * This information was prepared by Sheila Woodward with the assistance of Paul Van Olson of Marlow, Woodward & Huff, Prof. LLC. This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. This material is for information purposes only and is subject to change without notice. Page 1 of 8

5 ENGAGEMENT LETTERS A. Purpose. An engagement letter should define the scope of the attorney/client relationship. It should also identify how the attorney will be paid, describe the attorney/client privilege rules, and identify potential conflicts of interest. Several ethical rules are in play each time an attorney crafts an engagement letter. For South Dakota attorneys, particularly those handling estate planning or business matters, those rules may include: Rule Scope of Representation Rule Client Communication Rule Fees Rule Confidentiality Rule 1.7 & Conflicts between current and/or former clients Rule Organizations as clients Rule Diminished Capacity Rule Declining or Terminating Representation B. Considerations. In drafting engagement letters, there are several specific issues to consider in each representation. Each matter may raise different issues, so there is no one size fits all engagement letter. Some things to consider in entering into a new engagement, or even entering into a different engagement with a current client, are: 1. Who is the client? a. Married couples typically want to use one lawyer to do their estate planning. It is important to consider potential conflicts when representing married couples, including the need to withdraw if an issue comes up in the middle of the plan (e.g., undisclosed child of one of the parties, an undisclosed relationship with another party etc.). b. Multiple generations may wish to use the same attorney. The attorney must consider potential conflicts and get informed consents and waivers from the parties. For instance, if Mom and Dad decided to cut son out of their estate plan and son is also a client, it should be clear that the attorney has no duty to and will not tell son of the plan change in the absence of consent of the parents. c. When forming a business entity, the attorney must be clear whether the attorney is representing the entity or one or more individual owners. This is particularly important when drafting buy-sell agreements or management/operating agreements in which different owners may have different interests. d. If an attorney is representing a fiduciary in an estate or trust Page 2 of 8

6 administration, the attorney should inform the beneficiaries that the attorney is not their individual attorney and encourage them to seek outside legal advice if they believe it is warranted. 2. Define the scope and expected duration of the representation. An attorney should be as clear as possible about the intended scope and length of the relationship. If there will be any limitations to the scope of the representation, describe them. It is advisable to outline the client s responsibility to provide information, and specifically acknowledge that the attorney will rely on the information provided by the client. 3. Describe attorney client privilege/confidentiality issues. In particular, make sure the client understands that the privilege may not apply when third parties are present in any meeting. In the estate planning/business planning context, it is common to have accountants, financial planners, and even other family members present during certain meetings. Advise the clients, both in person and in writing, that communications when third parties are present are not necessarily confidential. It is also advisable to discuss the method of communicating information to the client, including the use (or nonuse) of Identify other people in the office who may assist the client if the attorney is not available. For example, provide the contact information for your paralegal if your paralegal assists in scheduling etc. 5. Describe the fee and billing arrangements, including how expenses are handled. 6. Consider discussing the impact of diminished capacity/death on the relationship, and the attorney s role in that event. 7. Describe the firm s document retention policy. 8. If the attorney does not carry professional liability insurance, SDCL requires that fact to be disclosed on the attorney s letterhead. C. Sample Engagement Letters. We have enclosed sample engagement letters for your review. Information in these samples has been obtained from samples promulgated by The American Counsel of Trust & Estate Counsel as well as the Nebraska State Bar Association. These are not definitive agreements, and each lawyer needs to develop his/her engagement letters individually. Estate Planning - Married couple - Exhibit #1 Trust/Estate Administration - Exhibit #2 Entity Formation - Exhibit #3 General Matters Exhibit #4 Page 3 of 8

7 FILE RETENTION GUIDELINES A. General Rule. There is no hard and fast rule on legal document retention in South Dakota. In Iowa, if a firm has a document retention policy, files must be maintained for at least 6 years. In the absence of a document retention policy, files must be maintained for at least 10 years. Because we have attorneys licensed in Iowa in our firm, we use 10 years as our guideline. 1. According to the American Bar Association Standing Committee on Ethics and Professional Responsibility (Informal Op (1977)), while a lawyer is not required to maintain files indefinitely, clients (including former clients) reasonably expect that their attorney will maintain the file for some period. 2. Professional liability carriers often have recommendations on file retention. Checking with the law firm s carrier to get those recommendations can be useful. 3. In any event, consistency is the key. B. Client Right to File. Upon termination of representation, the Rule 1.16 of the South Dakota ethics rules require a lawyer to take steps to the extent reasonably practicable to protect a client s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred. Rule 1.16(d); see also SD Ethics Opinion 96-7; SD Ethics Opinion Materials provided by the client such as money, securities, promissory notes, tax returns, the client 's own notes, and finished work product that the client has paid for constitute client property that must be preserved and returned on request. Items that are valuable to the client would include all pleadings, correspondence, research memorandums, notes, and drafts of documents that might still be used. 2. Items that would not normally be valuable include time sheets and billing accounts, internal administrative papers such as conflicts-checking forms, internal memorandums revealing a lawyer's general impressions of the client and the matter or the options for staffing or handling a case, and drafts of documents that would not be useful in continued representation. 3. In this committee s view, the lawyer need not deliver his/her internal notes and memos generated primarily for his/her own purposes in working on the client s problem. In between what must be provided to the former client and what the lawyer may refuse to provide, are any number of materials. In the committee s view, a lawyer should deliver all other material which may be deemed useful to the client in benefitting fully from the services he/she purchased from your firm. SD Ethics Opinion 96-7; see also SD Ethics Opinion Page 4 of 8

8 C. Trust Account Records. SDCL requires an attorney to maintain [c]omplete records of [trust] account funds and other property for a period of five years after the termination of representation of the client. D. Work Product. Certain work-product records, if not delivered to client at close of matter, may need to be retained longer to maintain client s claims or defenses: A lawyer should use care not to destroy or discard information that the lawyer knows or should know may still be necessary or useful in the assertion or defense of the client's position in a matter for which the applicable statutory limitations period has not expired. ABA Standing Committee on Ethics and Professional Responsibility, Informal Op (1977). Some items that need to be retained include: 1. Records of outstanding judgments or settlements not fully satisfied; 2. Files pertaining to the rights of minors, until the tolled statute of limitations applicable to any potential claims have expired; 3. Matrimony files involving ongoing support obligations 4. Criminal files; 5. Estate planning files until the estate has been distributed and the subsequent period for claims against distributes expired; 6. Materials of legal significance which for any reason cannot be or have not been returned to the client, including o recorded deeds, vital records (birth, marriage, death certificates), original bills of sale, original incorporation documents, stock or bond certificates, trademark and copyright registrations and original patents; and 7. Real estate title opinions and title insurance work. E. Engagement Letter. The attorney should describe the law firm s record retention policy in the retainer agreement or engagement letter so that the client understands at the outset of the representation that files will be maintained only for a specified period. The retainer agreement or engagement letter should also: 1 Inform the client that documents may be created in or transferred to electronic format. 2. Inform the client that original documents will be returned to the client upon conclusion of the representation. 3. Inform the client that the client may have the file at any time up to the expiration of the retention period. Page 5 of 8

9 4. Inform the client that if the file is not retrieved by a certain date, the file will be destroyed. The client should again be notified about how long the records will be retained at the end of the representation. Ideally, the client should receive another letter as the time for destruction of the file approaches to again notify them of their right to collect the file. 5. Inform the client of the charge, if any, to receive a copy of the file. See SD Ethics Opinion F. Formal Policies. Some firms adopt a formal document retention and destruction policy, and most professional liability carriers recommend that law firms do so. Your liability carrier may have a recommend policy for you to review. In general, a formal document retention policy addresses some or all the following issues: 1. With respect to document retention: a. Categorization of record storage locations and media. Lawyers may need to retain old software to maintain access to stored records; b. Assignment of custody of records and media types; c. Back-up of electronic or other volatile media; d. Document retention times; e. Designation of which attorney(s) have file maintenance authority; f. Process for collecting and segregating records upon file closure; g. Process for return of client property and original documents; h. Destruction protocol for each storage medium; i. Document storage and destruction logs; and k. Enforcement and auditing procedures. 2. With respect to document destruction: a. Documents without independent legal significance should be scanned and the paper destroyed as soon as practicable to minimize storage costs; b. If an outside party is used for shredding, a contract should be in place with written assurances of confidentiality. Page 6 of 8

10 c. Before destruction occurs, the firm should make sure that all scanned copies are easily searchable. d. Upon closure of file, the electronic and paper files should be entered into storage and segregated from active files with the destruction date calculated by the responsible attorney entered on the storage log. e. Ninety days prior to the expiration of the retention period, clients should be sent a written notice reminding them of their right to retrieve the documents and of the date of the documents destruction if not retrieved. f. Upon expiration of the retention deadline the file records should be promptly destroyed, and their destruction dated and logged by the responsible party. TERMINATING THE LAWYER-CLIENT RELATIONSHIP A. Mandatory Withdrawal. A lawyer must withdraw from the representation under Rule 1.16 if: 1. The representation will result in violation of the Rules of Professional Conduct or other law; 2. The lawyer's physical or mental condition materially impairs the lawyer's ability to represent the client (note that solo practitioners have an obligation to establish a contingency plan for their own incapacity and maintaining client files. ABA Comm. on Ethics and Professional Responsibility Formal Op ); or 3. The lawyer is discharged. B. Permissive Withdrawal. A lawyer may withdraw from the representation under Rule 1.16 if: 1. Withdrawal can be accomplished without material adverse effect on the interests of the client this is almost never the case; 2. The client persists in a course of action involving the lawyer's services that the lawyer reasonably believes is criminal or fraudulent; 3. The client has used the lawyer's services to perpetrate a crime or fraud; 4. The client insists upon taking action that the lawyer considers repugnant or with which the lawyer has a fundamental disagreement this should be raised in the engagement letter and discussed in writing before termination; Page 7 of 8

11 5. The client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled; 6, The representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client; or 7. Other good cause for withdrawal exists. C. Diminished Capacity. With clients with diminished capacity, the lawyer should make special effort to help the client consider the consequences of discharge or withdrawal and may take reasonably necessary protective action as provided in Rule SD Rule D. Notice. Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client. Page 8 of 8

12 EXHIBIT #1 John & Jane Doe 200 Unicorn Lane Yankton, SD May 25, 2018 Re: Estate Planning Engagement Dear John & Jane: Thank you for asking our firm to do estate planning for you. As we discussed, we will be preparing a joint revocable trust, medical powers of attorney, durable powers of attorney, pour over wills, a trust certificate, and the paperwork necessary to re-title your assets into the trust upon its completion. We will also discuss potential gifts to individuals or charities. Our firm does not prepare gift tax returns, however, so if such a filing becomes necessary you will need to have your accountant prepare those forms. I estimate the legal fees for preparing those documents to be $. There will also be sales tax, recording fees ($30/deed) and other miscellaneous third party fees that may be charged as part of re-titling the assets. We will advance those fees for you and add them to your bill. When we are working with clients, we like to make sure they understand their rights with respect to working with our firm. Consequently, we want you to be clear about the terms of our representation of you and your rights. 1. Attorney Client Privilege. You may be familiar with the concept of attorney client privilege which generally means that information you provide to your attorney cannot be disclosed to anyone else without your consent. That rule applies to our conversations and correspondence. However, when your accountant or other family members are part of our meetings or correspondence (including s), those communications are not protected by the privilege. What that means is that even though our firm will not divulge any information shared in those communications, in theory someone could force me or anyone else present at those meetings to testify concerning those communications. Because the estate planning process is a collaborative one, it is not unusual for other people - family members, professionals etc. to be present during our meetings. We want to caution you, however, to be sure that if you want to tell us anything in strict confidence, you should be sure to do so directly with me and not with any third parties present, whether it is an oral conversation or a written communication. Additionally, communications made via , other computer transmission, or cell phone may not be as secure from inadvertent disclosures as other forms of communication. We do use these methods to

13 communicate with our clients, however. By furnishing us with an address or cell phone number, you are authorizing us to communicate with you using this mode of communication despite the potential disclosure risks. Please also understand that if you communicate with us via a corporate or an employer account, under some circumstances those communications might not be considered privileged, which may give third parties access to them. You may want to consider accessing and originating s through the use of only your personal computer, not a business or employer computer. 2. Spousal Representation. While typically an attorney represents one person in a transaction, when we are doing estate planning for a married couple, we represent both of you. Estate planning can give rise to conflicting interests between spouses. For example, you may have different opinions as to the property to be left to your children or other family members. If you are the first to die, you may want to restrict your spouse s ability to change your plan or use certain assets, yet you may also want unfettered use of those assets if your spouse dies first. As counsel for both of you, we are generally prohibited from advocating one of your positions over the other. Additionally, and although it rarely happens, if one of you wants to disclose information to us that you do not want your spouse to know, you cannot do so. The ethics rules require us to share communications from either of you with both of you. Accordingly, by agreeing to have us represent both of you, you are authorizing us to disclose to the other information that one of you shares with us, or that we acquire from another source which, in our judgment, requires disclosure. If an actual conflict arises between you that we believe makes it impossible for us to live up to our ethical obligations to both of you, we will withdraw from representation and advise each of you to seek other counsel. While this is rarely an issue we want to be sure that you understand it at the beginning of our joint representation. 3. Representation of Other Parties. As we are sure you realize, our law firm represents other clients, including financial institutions, accountants, other advisors, and charities. You may decide to name one or more of those charitable entities as beneficiaries of your estate. You may also decide to name a financial institution or other third party that we represent as a Personal Representative or Trustee in your plan. By signing this letter and agreeing to our representation, you waive any conflict of interest that may arise from these circumstances. 4. Documents You Provide. As part of our representation, you will need to provide us with information concerning your assets, including descriptions of real estate and information about your financial holdings (investments, retirement accounts, life insurance, etc.). We will rely on the information you give to us in developing your estate plan and will not undertake any independent investigation. By providing those documents to us, you are representing that they accurate disclose your financial matters. We are not responsible for undesired consequences caused by your failure to disclose information to us. Additionally, we will rely on the most recent deed in the chain of title for any real estate you own, and will not do an independent title search to determine the accuracy of title unless you direct us to do so. 5. Your File. It is impossible for us to retain documents forever. Upon completion of your estate plan, we will scan your documents and other pertinent information, and then destroy the copies. If you want us to return any documents, please notify us and we will do so. We will maintain your file via electronic or other means for 10 years after our representation terminates. Your file consists of all papers and electronic copies of documents you signed, as well as copies of deeds, beneficiary designations, and other agreements. We do not retain original estate planning documents for our clients. Consequently, at the conclusion of our representation, you will need to make arrangements to store those documents. 6. Disability or Death. As part of your estate plan, we will discuss with you the steps you

14 should take to ensure that your wishes are met upon your death or disability. This will include naming one or more fiduciaries (for example, an executor, trustee, and/or power of attorney) to act on your behalf if you are not able to do so. If concerns develop regarding your capacity during our representation of you, we will continue to represent you and protect your interests consistent with our ethical obligations to the extent possible. We will only take those actions that we reasonably believe are in your best interests and consistent with our previous discussions. If concerns do arise regarding your capacity, by signing this letter you authorize our firm to take the following actions which may result in the disclosure of certain confidential information: (1) to contact your immediate family, physician, accountant, or other financial advisors and disclose pertinent information, even if it is confidential, that we believe is necessary to enable those parties to act in your best interests; and (2) to represent any person you have nominated as your legal representative (including a power of attorney or successor trustee) to act in the event of your disability. Additionally, if you die or become incapacitated and we receive a request for a copy of your documents, by your signature on this agreement you authorize us to provide a copy of the documents to the person(s) you have named to act on your behalf in the event of your death or disability, that is, to the power of attorney, trustee, or personal representative. 7. Termination of Representation. Once we have completed the documents outlined at the beginning of this letter, our engagement with you for estate planning will be terminated. We will always be happy to provide additional services in the future. You can also terminate our services at any time by notifying us in writing. Upon receipt of that notice, we will immediately cease providing services for you. In that event, we will bill you for the time we have on the file through the date of determination. Similarly, we may terminate our representation of you at any time by providing you with a written notice of termination. I enjoy working with clients to develop a practical and effective estate plan. If you consent to my representation of you under the terms of this letter, please sign below and return the letter to me in the enclosed envelope or scan it and send it to me via if you prefer to do so. If you have any questions about this letter, let me know. Sincerely, Marlow, Woodward & Huff, Prof. LLC Sheila S. Woodward For the Firm

15 CONSENT Each of us has read this letter and understand its contents. We consent to Marlow, Woodward & Huff, Prof. LLC representing both of us on the terms and conditions set forth in this letter. Dated this day of, Dated this day of, John Doe Jane Doe

16 EXHIBIT #2 Jane Doe 100 Woodsonn Drive Yankton, SD May 25, 2018 Bill Doe 504 Park Blvd Hurley, SD Re: Legal Services for Trust Dear Jane & Bill: Thank you for retaining our law firm to assist you in the administration of the Trust. The purpose of this letter is to make sure you understand both my role in the administration process and what your job as trustee entails. 1. Summary of Services. We will provide those services that are necessary and appropriate to administer the Trust under South Dakota law. We can do as much or as little of legwork needed to identify assets, value assets, and pay administration costs as you would like us to do. Items that need to be addressed include: Providing a copy of the trust document (including any pertinent amendments) to all trust beneficiaries to start the 60 day period for any trust contest. Obtaining a Taxpayer Identification Number ( TIN ) for the Trust. Contacting all brokers and banks to inform them that you the successor trustee for the trust. Please let me know if you would prefer to do this on your own. You will need to open a new checking account using the new TIN. All trust bills should be paid from one account if possible so that it is easy to provide an accounting to the trust beneficiaries. Preparing an inventory of all trust assets with date of death value. You will need to inventory any safe deposit boxes. We will order appraisals of real estate as necessary after consultation with you. Once completed, we will provide a copy of the inventory to all beneficiaries entitled to review it.

17 Contacting life insurance and retirement plan advisors to obtain the paperwork to collect these benefits. Let us know if you would prefer to make these contacts on your own. You should visit with any brokers to determine if the trust investments should be converted to cash to preserve the trust corpus for distribution. Working with an accountant to determine what trust and/or personal income tax filings will be required. If the total estate assets (including life insurance and retirement benefit proceeds) exceed $, a federal 706 estate tax return filing is necessary. The federal estate tax return must be filed no later than nine (9) months after the decedent s date of death. In this case, the return would be due on. Our firm does not prepare income or estate tax returns, but we will work with an accountant approved by you to provide the information needed for the preparation of the returns. 2. The Client. We represent you only in your fiduciary capacity as Trustee. We do not represent individual trust beneficiaries (including you), even though we will provide them with information regarding the trust administration. In appropriate cases, we will advise individual beneficiaries (including yourself) to retain separate counsel. Because you are a beneficiary of the Trust, we cannot advocate for you to maximize your share. If there is a dispute between you and one or more beneficiaries regarding distribution, you will have to seek independent counsel. Apart from any legal requirement to notify the beneficiaries of the trust that the trust is being administered, we consider it good practice to do so. As a result, we recommend that you provide quarterly accountings to the trust beneficiaries, either via a spreadsheet or even just with copies of the trust checking account statements from Quickbooks, so that they can be kept apprised of bills paid and the status of the administration. 3. Attorney-Client Communications. Any relationship between a client and an attorney is subject to our ethical rules. In trust administration, ethical rules applicable to conflicts of interest and confidentiality are of particular concern. It is therefore critical that you keep us informed of your activities to avoid potential problems. For example, it is important that you visit with us prior to taking trustee s fees, making personal property distributions, allowing someone to reside in real property owned by the trust, or other similar actions. The attorney-client privilege generally applies to communications between us. However, there are exceptions. For example, when your accountant or other beneficiaries are part of our meetings or included in our written communications such as , those communications may not be protected. Moreover, in some circumstances a fiduciary is required to disclose communications with its attorney to a beneficiary if the communication was in furtherance of the beneficiary s interest. Please keep this in mind when asking us to share information with third parties, including beneficiaries. Finally, generally communications made via , other computer transmission, or cell phone may not be as secure from inadvertent disclosures as other forms of communication. We do use these methods to communicate with our clients, however. By furnishing us with an address or cell phone number, you are authorizing us to communicate with you using this mode of communication despite the potential disclosure risks. Additionally, by furnishing an address to us, you are indicating to us that your is secure, that you do not use your employer s server to receive communications from us, and that we have your permission to send information to that address. 4. Co-Trustees - Waiver of Conflict. It is common for Co-Trustees to employee the same law firm to assist them in administering the trust as you have requested us to do. Please understand that because

18 we represent both of you, we will provide joint representation and will provide the same information to both of you. By agreeing to this form of representation, you authorize us to disclose to your co-trustee information that one of you shares with us or that we acquire from another source that is pertinent to the administration of the trust. If a conflict arises between you in the course of the trust administration, we can point out the pros and cons of your respective positions, but we cannot advocate one of your positions over the other. By signing this letter, you waive any conflict which may arise by virtue of the fact that we represent you jointly. If an actual conflict arises between you that, in our judgment, makes it impossible for us to live up to our ethical obligations to both of you, we will withdraw as your joint attorney and advise each of you to see other counsel. 5. Fees. Our current hourly rate for partners such as myself is $ an hour. Our hourly rate for associates is. In addition to the hourly fees, we may incur expenses for things such as filing fees, appraisal costs, copy charges, and facsimile charges. These items are separately itemized on our statements. Where the expenses involve payment to persons outside the firm, we may request that you pay those expenses directly, or we will advance those expenses and bill you for the same. Computerized legal research is currently provided by our firm to all of our clients free of charge except in exceptional circumstances. This research enables us to provide you with the most current legal authorities supporting our legal positions. We generally mail statements for services and expenses on a monthly basis on the 25 th of each month. We expect payment soon after the statement date. 6. Fiduciary Responsibilities. A trustee is a fiduciary. This means you have an obligation to act in the best interests of the trust and not in your own interests. As the trustee, you have the following duties and obligations: Duty of Loyalty. You must administer the trust solely in the interest of the trust beneficiaries, deal fairly with all beneficiaries, and communicate all relevant information to the beneficiaries. Duty of Impartiality. You must administer the trust in a way that is impartial to all beneficiaries. In short, you must treat each beneficiary fairly both in administration of the trust and in the investment of trust assets. Duty to Provide Information. You must provide information to the beneficiaries on a regular basis. You also must promptly respond to questions from the trust beneficiaries. Duty to Control & Care for Trust Property. As the trustee, you must take steps to control all trust property, not only by taking physical possession of it as necessary, but also by making sure the property is properly titled in the name of the trust. It is your job to make sure all real estate taxes are paid, and to make sure that all trust property is properly insured. Expenses for taxes, insurance, and similar items necessary for upkeep of trust property are properly paid from the trust funds. Duty to Make Prudent Investments. Trust investments must be prudent. Depending upon how long the trust is anticipated to exist, it may be advisable for you to cash out of investments that are volatile to preserve the trust property for anticipated distributions to the beneficiaries. You may also have a duty to diversify trust assets and to consider the risk and return from the entire trust portfolio.

19 7. Your File. It is impossible for us to retain documents forever. Upon completion of the trust administration, we will scan your documents and other pertinent information, and then destroy the copies. If you want us to return any documents, please notify us and we will do so once they are scanned. We will maintain your file for 10 years after our representation terminates. After that time, your file may be automatically destroyed without further notice to you. Your file consists of all papers and electronic copies of documents you signed, as well as copies of deeds, beneficiary designations, and other agreements. 8. Termination of Engagement. You may terminate our representation at any time by giving us written notice. At that time, we will cease providing legal services, subject to court approval if necessary. You will be responsible for paying for our services up until the time we receive the termination notice as well as any reasonable services provided after that receipt in connection with the transfer of responsibility of the legal matters to another attorney or in connection with obtaining court approval to withdraw. We may also terminate our representation of you by providing written notice. If we do so, you will be responsible for paying for our services rendered until termination, and for reasonable services that we provide to transfer responsibility of the matter to your new counsel. If you approve of this arrangement, please sign below and return your consent to us in the envelope provided, or via if you prefer. Sincerely, Marlow, Woodward & Huff, Prof. LLC Sheila S. Woodward For the Firm CONSENT I/We have each reviewed the foregoing letter concerning the various aspects of joint and separate representation, and I/we agree to have Marlow, Woodward & Huff, Prof. LLC represent me/us as Trustee of the Trust on the terms described in the letter. Dated, Dated, Trustee 1 Trustee 2

20 EXHIBIT #3 Side Show Bob Terwilliger 200 Unicorn Drive Yankton, SD May 25, 2018 Waylon Smithers 101 Mr. Burns Lane Yankton, SD Re: Agreement for Legal Services - Business Entity Formation Dear Side Show and Waylon: Thank you for retaining our law firm to assist you with the formation of Go Jets Go, LLC. I like to describe the scope of my representation of clients, and to confirm our fee arrangement with them in writing. I find it beneficial for clients to have these matters discussed at the onset of the representation. This letter describes the basis on which our firm will provide legal services and how we will bill for those services. While I will have primary responsibility for this representation, other attorneys in my firm may also assist. Additionally, my paralegal (paralegal@mwhlawyers.com) handles all of my scheduling and can assist you if I am not available. 1. Summary of Services. We will provide those legal services that are necessary to create Go Jets Go, LLC as a limited liability company under South Dakota law. This will include provide advice about the ownership and management structure of the company, the preparation and filing of organization documents including Articles of Organization and an Operating Agreement, and documents necessary to establish the initial funding of the company. We will also assist in the preparation of a buy-sell agreement providing for the sale of ownership interests in the company in the future. [ADD ANY OTHER SERVICES TO BE PROVIDED] 2. The Client. Our client will be Go Jets Go, LLC. We will not represent either of you individually. It is important that you recognize that the interests of Go Jets Go, LLC may not always be identical to your interests, and the interests of each of you may conflict as well. Each of you may wish to retain separate counsel to advise and represent you separately, particularly if you sense a conflict arising between you regarding management or other issues. 3. Confidential Information. As the attorneys for Go Jets Go, LLC, we must preserve any confidential information we receive unless we are authorized to disclose it by the company. We have a duty to act solely in the best interests of the company without being influenced by any conflicting interests of individual owners. Each of you may have different or conflicting interest and objectives. For example, you may have different views on how the management of the company should be structured or terms that should be included in any buy-sell agreement. Some decisions may favor one of you tax wise but be unfavorable to the other. These are just general examples. However, because our client is Go Jets Go, LLC, and not either of you individually, we cannot advise you on any personal impact a proposal may have and it may be necessary for you to consult with a separate attorney.

21 As noted previously, either of you is free to engage separate counsel to represent your personal interests at any time. In that case, we will continue to represent Go Jets Go, LLC unless the company terminates our representation by duly authorized action. 4. Termination of Engagement. Go Jets Go, LLC may terminate our representation at any time by giving us written notice. At that time, we will cease providing legal services, subject to court approval if necessary. Go Jets Go, LLC will be responsible for paying for our services up until the time we receive the termination notice as well as any reasonable services provided after that receipt in connection with the transfer of responsibility of the legal matters to another attorney or in connection with obtaining court approval to withdraw. We may also terminate our representation of Go Jets Go, LLC by providing written notice. If we do so, Go Jets Go, LLC will be responsible for paying for our services rendered until termination, and for reasonable services that we provide to transfer responsibility of the matter to your new counsel. 5. Fees/Costs. Our current hourly rate for partners such as myself is $ an hour. Our hourly rate for associates is. In addition to the hourly fees, we may incur expenses for things such as filing fees, copy charges, and facsimile charges. These items are separately itemized on our statements as expenses. Where the expenses involve payment to persons outside the firm, we may request that you pay those expenses directly, or we will advance those expenses and bill you for the same. Computerized legal research is currently provided by our firm to all of our clients free of charge except in exceptional circumstances. This research enables us to provide you with the most current legal authorities supporting our legal positions and allows us to verify that research relied upon by our opponents is still good law. We generally mail statements for services and expenses on a monthly basis on the 25 th of each month. We expect payment soon after the statement date. We do not require a retainer to represent you in this matter. 6. Attorney Client Privilege. You may be familiar with the concept of attorney client privilege which means that information you provide to your attorney cannot be disclosed to anyone else without your consent. That rule applies to our conversations and correspondence. However, if your accountant or other third parties are part of our meetings, conversations we have in front of these individuals are not protected by the privilege because there are outsiders present. What that means is that even though our firm will not divulge any information you share in those communications, in theory someone could force me or anyone else present at those meetings to testify concerning those conversations. Similarly, if you choose to communicate with us or authorize us to communicate with you via facsimile or and other people have access to the fax machine or , the attorney-client privilege may be lost as well. Please keep this in mind when asking us to share information with third parties or when you share information with (or grant access to) others who are not part of our attorney-client relationship. Additionally, communications made via , other computer transmission, or cell phone may not be as secure from inadvertent disclosures as other forms of communication. We do use these methods to communicate with our clients, however. By furnishing us with an address or cell phone number, you are authorizing us to communicate with you using this mode of communication despite the potential disclosure risks. Finally, whether or not you are represented by separate counsel, neither of you individually can invoke a duty of confidentiality as between you and the others to prevent us from disclosing to the other owners any information we receive from you that is relevant and material to the organization of the company. We have an ethical obligation to share with each of you any information we receive from the other or from

22 an outside party that will materially impact the LLC. 7. Documents You Provide. You will likely need to provide us with information concerning the Company and its anticipated assets, potentially including descriptions of real estate and information about the company s financial holdings or financing. We will rely on the information you give to us and will not undertake any independent investigation. We will rely on the most recent deed in the chain of title for any real estate you identify to transfer to the LLC, unless you direct us to do an independent title search to determine the accuracy of that deed unless you direct us to do so. 8. Your File. It is impossible for us to retain documents forever. Upon completion of the organization of Go Jets Go, LLC, we will scan your documents and other pertinent information, and then destroy the copies. If you want us to return any documents, please notify us and we will do so. We will maintain your file for 10 years after our representation terminates. After that time, your file may be automatically destroyed without further notice to you. Your file consists of all papers and electronic copies of documents you signed, as well as copies of deeds, beneficiary designations, and other agreements. 9. Consent. Before our firm can begin representation of Go Jets Go, LLC, each of you must consider the information contained in this letter and consent to the terms outlined in it. If you agree to the terms, please sign the statement that follows this letter to indicate your consent. If, after considering this information, you prefer a different form of representation or have questions, please let me know. Please return your consent to me in the enclosed envelope or via . I appreciate the opportunity to work with you. Sincerely, Marlow, Woodward & Huff, Prof. LLC Sheila S. Woodward For the Firm CONSENT We have each reviewed the foregoing letter concerning the various aspects of joint and separate representation, and we choose to have Marlow, Woodward & Huff, Prof. LLC represent Go Jets Go, LLC separately in connection with its organization on the terms described in the letter. Dated, Dated, Organizer 1 Organizer 2

23 EXHIBIT #4 John & Jane Doe 200 Unicorn Lane Yankton, SD May 25, 2018 Re: Agreement For Legal Services Dear John & Jane: Thank you for asking our firm to represent you with regard to. When we are working with clients, we like to make sure their understand their rights with respect to working with our firm. Consequently, we want you to be clear about our representation of you and your rights. 1. Summary of Services. You have asked us to provide and we have agreed to provide the following legal services to you:. 2. Fees/Costs. We will bill you on an hourly basis. Our current hourly rate for partners such as myself is $ an hour. Our hourly rate for associates is. In addition to the hourly fees, we may incur expenses for things such as filing fees, copy charges, and facsimile charges. These items are separately itemized on our statements. Where the expenses involve payment to persons outside the firm, we may request that you pay those expenses directly, or we will advance those expenses and bill you for the same. Computerized legal research is currently provided by our firm to all of our clients free of charge except in exceptional circumstances. This research enables us to provide you with the most current legal authorities supporting our legal positions and allows us to verify that research relied upon by our opponents is still good law. We generally mail statements for services and expenses on a monthly basis on the 25 th of each month. 3. Attorney Client Privilege. You may be familiar with the concept of attorney client privilege which means that information you provide to your attorney cannot be disclosed to anyone else without your consent. That rule applies to our conversations and correspondence. However, if your accountant or other third parties are part of our meetings, conversations we have in front of these individuals or documents (including s) shared with these individuals are not protected by the privilege because there are outsiders present. What that means is that even though our firm will not divulge any information you share with us, in theory someone could force me or anyone else present at those meetings or who receives the communication to testify concerning those communications. Similarly, if you choose to communicate with us or authorize us to communicate with you via facsimile or and other people have access to the fax machine or , the attorney-client privilege may be lost as well. Please keep this in mind when asking us to share information with third parties or when you share information with (or grant access to) others who are not part of our attorney-client relationship.

24 Additionally, communications made via , other computer transmission, or cell phone may not be as secure from inadvertent disclosures as other forms of communication. We do use these methods to communicate with our clients, however. By furnishing us with an address or cell phone number, you are authorizing us to communicate with you using this mode of communication despite the potential disclosure risks. Please also understand that if you communicate with us via a corporate or an employer account, under some circumstances those communications might not be considered privileged, which may give third parties access to them. You may want to consider accessing and originating s through the use of only your personal computer, not a business or employer computer. 4. Your File. Due to the number of clients we represent, it is impossible for us to retain documents forever. Upon completion of your estate plan, we will scan your documents and other pertinent information, and then destroy the copies. If you want us to return any documents, please notify us and we will do so. We will maintain your file via electronic or other means for 10 years after our representation terminates. 5. Termination of Representation. Once we have completed the tasks outlined at the beginning of this letter, our legal engagement with you will be terminated. We will always be happy to provide additional or continuing legal services, but those services will be provided via a separate agreement. You can also terminate our services at any time by notifying us in writing. Upon receipt of that notice, we will immediately cease providing services for you. In that event, we will bill you for the time we have on the file through the date of determination. Similarly, we may terminate our representation of you at any time by providing you with a written notice of termination. 6. Consent. Before our firm can commence representation of you, you must consider the information contained in this letter and consent to the terms outlined in it. If you agree to the terms, please sign the statement that follows this letter to indicate your consent. If, after considering this information, you prefer a different form of representation or have questions, please let me know. Please return your consent to me in the enclosed envelope or via . Sincerely, Marlow, Woodward & Huff, Prof. LLC Sheila S. Woodward For the Firm

25 CONSENT I/We have each reviewed the foregoing letter concerning the various aspects of joint and separate representation, and we choose to have Marlow, Woodward & Huff, Prof. LLC represent us on the terms described in the letter. Dated, Dated, Client 1 Client 2

26 What Title Companies Want Attorneys to Know Eric Hanson Dakota Homestead Title Insurance Company; Sioux Falls, SD Today s presenter is Eric Hanson. Mr. Hanson is the President of South Dakota s only domiciled title insurance underwriter, Dakota Homestead Title Insurance Company and its parent company, Homestead Holdings, Inc. In that role he oversees and manages the Meierhenry Homestead Title Settlement Provider family of title companies throughout eastern South Dakota. Mr. Hanson also serves and the Vice President and Corporate Counsel for Homestead Escrow and Exchange Company s 1031 tax deferred exchange business. Mr. Hanson is from Sioux Falls and is a 2009 graduate from South Dakota State University and graduated with honors the University of South Dakota School of Law in Prior to starting as Corporate Counsel for Dakota Homestead, Mr. Hanson served as a law clerk for the First Judicial Circuit from

27 TOP 10 THINGS ABSTRACTERS / TITLE COMPANIES WANT ATTORNEYS TO KNOW Eric Hanson Dakota Homestead Title Insurance Company

28 Key Terms and Information Abstracter licensed professional who searches the public record and reports what items may impact title (SDCL 36-13) In the past abstracters primarily prepared abstracts of title for attorneys to review and issue attorney s opinions Now, they primarily preform searches for title insurance commitments and policies according to title insurance underwriter guidelines Title Company a/k/a title plant (exact duplicate of the Register of Deeds / public land records, updated daily) Cannot conduct business in any county where they do not possess a plant (have to use the Counter-Signature system to order title work from a company who has a plant in that county) Abstracter / Title Department conducts all searches, prepares and signs all commitments and policies Closing Department prepares all settlement statements and other closing documents; receives and disburses funds; and makes sure that all necessary steps are taken to transfer and/or encumber property

29 Key Resources South Dakota Land Title Guide (aka Green Book ) primary manual / study guide to prepare for the Abstracter Exam It is the best collection of South Dakota statutes, court cases and title examination guidance out there South Dakota Title Standards (SDCL 43-30A) restatement of law (statutory and case law) Provide presumptions of law only, but abstracters follow until presented with information to the contrary

30 #1 Marital Status / Homestead Primarily concerned with complying with SDCL Execution by husband and wife necessary for conveyance or encumbrance-- Exception for prisoner of war or missing in action. A conveyance or encumbrance of a homestead by its owner, if married and both husband and wife are residents of this state, is valid if both husband and wife concur in and sign or execute such conveyance or encumbrance either by joint instrument or by separate instruments. However, for the sole purpose of a spouse of a person in the armed forces making application for a home loan under 38 U.S.C. 1701, et seq., the signature of the spouse alone is sufficient to convey or encumber the homestead if the person in the armed forces is officially declared to be: missing in action, captured in line of duty by a hostile force, or forcibly detained or interned in line of duty by a foreign government or power. To encumber or convey homestead property BOTH SPOUSES must EXECUTE the conveying or encumbering instrument Failure to do so makes the instrument VOID If both spouses are in legal title to the property, they both have to sign the instrument regardless of homestead concerns because of their ownership interest

31 Marital Status / Homestead South Dakota only recognizes two marital statuses single and married Married but legally separated does not exist in the homestead and transfer statutes If a person is married and the property is homestead, their spouse must sign the instrument The non-title spouse is not required to be listed as borrower, sign the note, or any other non-title documents

32 Marital Status / Homestead South Dakota does NOT authorize Homestead Waivers! No statute or holding specifically allows a nontitled spouse to sign a Homestead Waiver in lieu of signing a deed or mortgage of homestead Thus, underwriters require the spouse of married grantors and borrowers to sign the same instrument or a counterpart copy like SDCL requires

33 Marital Status / Homestead Instrument Prep Reminder ALL deeds and mortgages must recite the marital status of the grantor (Title Standard 5-03) Failure to do so makes the instrument defective unless the land record otherwise (BUT TIMELY) discloses the marital status of the grantor and the homestead status of the property

34 #2 Divorce Beyond the homestead issue associated with separated and divorcing spouses, divorce proceedings present plenty of other issues for title companies Ownership of the real property is often changed per the divorce / property settlement, but the post-divorce record transfer of land is often ignored

35 Divorce Practice Tip make sure the Divorce Decree, Property Settlement Agreement, etc. are clear regarding which specific property is being addressed (via legal description and ideally also street address) and which party has obligations relative to it Common descriptions alone, like marital house or Respondent s farm, are of no use to title examiners

36 Divorce Deeds from one spouse to another per the divorce settlement routinely are not (timely) made and recorded Results in former spouses remaining as record title owners for years after the divorce proceedings Often a challenge to fix as ex-spouses can be difficult to locate or unwilling to sign necessary deeds so their former spouses can sell or refinance property PRACTICE TIP consider including specific language in your Divorce Decrees that provides the Decree itself may act as the conveying instrument when recorded in the land records if no such deed transferring the property from one spouse to the other is not recorded within X amount of time

37 Divorce Be aware that lump sum monetary awards (nonperiodic payments) act as a money judgment against the debtor spouse and will become a lien against all his/her real property in the counties where the divorce judgment is docketed and transcribed So, while one party may get the house, their ex may have a lien against it. Upon payment or compromise, creditor-spouse needs to make and file / record a satisfaction / release

38 #3 Deed Preparation SDCL provides the document recording standards for all title documents (except plats) If not in compliance, RODs may refuse to record. Even if recorded, document may not establish priority / constructive notice (e.g., defective acknowledgments) The Prepared by must include your name / firm name, address, and phone number in the upper left-hand corner of the first page s top 3 margin (the remainder of that 3 margin is for RODs recording info

39 Deed Preparation The transfer fee ($1.00 per $1,000.00) or the applicable exemption (SDCL ) must be included in the deed Certificate of Real Estate Value must accompany the deed Coordinate with the closing agent regarding who is preparing the deed and CREV to ensure that gets done and to avoid duplication

40 Deed Preparation Often the legal description for a deed is taken directly from a title search or commitment, which can be a mistake If there are multiple properties listed, do not include labels such as Parcel 1 and Parcel 2 as those are used to reference the different parcels in the title search / commitment only and are NOT part of the actual legal descriptions Make sure to use the correct conveyance language for the particular deed at issue, Warranty Deed, Grant Deed, Quit Claim Deed PRACTICE TIP double check your PR Deed and Trustee Deed Forms Grantee Co-tenancy SD has Tenants in Common and Joint Tenancy only

41 Deed Preparation Do not be afraid to put additional information in the deed (or other instrument) that can be used to make intentions clear and to cure errors and omissions of record Also known as and formerly known as can be used to connect chains of ownership for individuals or entities that have changed names since they originally received title If the transfer is part of a divorce or other court proceeding, reference that fact and possibly the court file number so that there is no confusion if such a transfer was made If the property has been known by a prior but defective legal description, consider listing both the correct legal as well as the historic but incorrect legal with a notation like previously incorrectly described as

42 Deed Preparation Ethical Considerations Who is the Client? Unless you are handling the closing yourself or the transaction involves your client, most attorneys are preparing deeds because a title company or someone else requested it from them Since the cost of the deed prep is paid directly by the customers and it is a legal document for their benefit, it is possible that a limited attorney client relationship could be found to exist if a dispute over the deed erupted Consider having a 1-page document to sign by the party paying for the instrument outlining your limited role and making clear that if any attorney-client relationship existed, it terminated upon the parties use of the instrument

43 #4 Entities Whenever entities are involved in real estate transactions, title companies require proof of: LEGAL EXISTENCE / CAPACITY SPECIFIC AUTHORITY TO ACT Such submitted proof is really the same regardless of entity (corporations, LLCs, partnerships, trusts, etc.)

44 Entities Legal Existence and Capacity For a transaction involving an entity to be valid, the entity involved must be an existing, identifiable entity that has the capacity to convey, receive or encumber title to the real property Title companies utilize the South Dakota (plus other states ) Secretary of State Business Search website daily to establish and entity legal existence (and status) PRACTICE TIP if your client s entity is filed in another state, just let the title company know where that entity is domiciled Entities must have the legal capacity, power, ability and both general and specific authority to perform the required act (SDCL & )

45 Entities Authority to Act While the default business statutes provide for general powers for entities to engage in real estate transactions, specific authorization is needed for each transaction stating: That the entity approves of the specific transaction and actions to be taken; AND That the entity has designated a specific person(s), officer(s), member(s), partner(s), trustee(s), etc. to undertake the authorized act on behalf of the entity Insured transactions do not rely upon the presumption that all transactions undertaking by an entity are authorized and valid as long as they are signed by relevant party in the name of the entity and acknowledged in the proper form since this is just a presumption Specific entity authorization can be in the form of a resolution (corporations, LLCs, partnerships) or Certificate of Trustee (SDCL ), signed by all necessary parties, which explicitly states that the proposed transaction is authorized and lists the person(s) authorized to act

46 Entities Proper Acknowledgments One of the most common problems in the title world is the use of the incorrect acknowledgment form for the grantor involved in the transaction Ex. Individual acknowledgment used for an entity transaction Title 18 and in particular SDCL 18-4 and 18-5 provide specific notary forms for individuals, partnerships, corporate entities, attorneys in fact, and fiduciaries HB 1170 this year would have added electronic acknowledgments, it was tabled but this will be an issue in the future

47 Entities Defective Acknowledgments present a large problem to title companies because any instrument with a materially defective acknowledgment fails to provide constructive notice (unless cured) for 10-years from the date of filing, even if it was properly recorded and indexed Bankruptcy Trustees have been trained to closely examine all acknowledgments on secured transactions because defects may allow them to treat those creditors as unsecured and increase the available assets in the bankruptcy estate

48 # 5 Powers of Attorney More transactions are involving powers of attorney with attorneys in fact appearing on behalf of the principal at the time of closing For a POA to be effective for an AIF to act on behalf of the principal in a real estate transaction, it must: Be signed, attested, acknowledged, and certified as provided in SDCL and (basically comply with all of the formalities of a deed of conveyance) Be effective and unrevoked by the principal Explicitly give the AIF the specific power(s) to act to complete the proposed transaction (cannot imply real estate powers) Be recorded with the local RODs

49 Powers of Attorney SD Title Standard 5-18 addresses the proper way an instrument should be executed by an AIF: A conveyance or encumbrance executed by an attorney in fact in behalf of the principal must identify the principal in the body of the instrument. The attorney in fact must then sign the name of the principal and his or her own name as attorney in fact, although it is permissible to type the name of the principal. Example Chris Moran by Eric Hanson, his attorney in fact The acknowledgment must also properly reflect that the instrument was executed by the AIF on behalf of the principal (SDCL and have the form that can be used)

50 Powers of Attorney POAs ARE CONTROLLED AND LIMITED BY THE PRINCIPAL S CAPACITY (CANNOT GIVE MORE POWER THAN PRINCIPAL HAS) A grant of a personal POA does not empower the AIF to act for the principal in other capacities the principal may have, like a trustee of a Trust An entity must grant its own POA to a designated AIF or the underlying entity creation document must allow for officers, trustees, fiduciaries, etc. to make such grants Remember typically business entities (alternative signers, resolutions) and trusts (concurrent or successor trustees) have mechanisms in place as to who else should act on behalf of the entity other than via POAs

51 #6 Acting as a Settlement Agent Be aware that if you are acting as a settlement agent for any transaction (especially for consumer home loans) that there are a variety of federal regulations that impose very specific requirements, disclosures and rules that must be complied with including: RESPA Real Estate Settlement Procedure Act TILA Truth in Lending Act TRID / Know Before You Owe Rule Consumer Financial Protection Bureau (CFPB)

52 Acting as a Settlement Agent Failure to comply with those rules and regulations may mean the imposition of civil and possibly criminal penalties per violation Regulatory schemes are set-up heavily in favor of the consumer and there is very little lenience for lenders, realtors, and settlement agents Necessary compliance with these strict regulations are typically the reason why last minute changes in settlement figures result in delays in closing

53 Acting as a Settlement Agent If you provide settlement services, be aware of the following: DO carefully review all closing instructions from the parties, lender, and anyone else so that you fully comply with them If you cannot comply with all or part of them contact the party who provided the instructions, see if they can update them to ones you can comply with If you cannot get updated instructions, be sure to properly annotate the instructions to match what you did and did not comply with DO utilize settlement service software as specific forms (Consumer Disclosure, ALTA Settlement Statement, HUD-1, etc.) are likely required DO NOT share information related to one party s side of the settlement statement with the other side unless you have specific authorization to do so (Non-Public Private Information NPPI issues) DO use secured to send and receive NPPI and verbally verify all wiring instructions to help protect against wire fraud (#1 costly issue) DO NOT delay in recording documents Loss of priority because of delays or mistakes of the settlement provide can be expensive and time consuming to fix even if the best of circumstances DO ask questions and get specific confirmations in writing (Closer s Golden Rule ) Verbal authorizations are insufficient if disputes arise after the fact DO NOT engage in any closing that you do not feel capable or comfortable handling

54 #7 Plats and Access Two common title issues with plats: Missing signatures on the recorded plat Easements shown on the plat do not legally exist Missing Signatures All parties with an interest in the property MUST execute the plat for it to be valid Often owners are omitted or sign in their incorrect capacity making the plat invalid Only true fix is recording a new, properly executed and acknowledged plat Affidavits or Certifications of Plat likely do not legally work to fix the issues but are sometimes accepted by title companies

55 Plats and Access Often plats depict access easements across the property If the same party owns both the dominant and servient estates, any easements depicted therein are not created because of the doctrine of merger (cannot be the owner of both the lessor and greater estates in real property at the same time) In order to validly create a depicted easement in such a case, the easement needs to be created in a separate instrument once there is uncommon ownership of the dominant and servient estates This is often handled in either the conveying instrument or in a separate appurtenant easement executed when the owner sells the dominant or servient estate to someone else

56 #8 Transfer on Death Deeds Created in 2014 to allow for non-probate transfers of real property from the transferor to their listed beneficiaries (think pay on death bank accounts) Found in SDCL 29A on (South Dakota Real Property Transfer on Death Act) and based on the Uniform Transfer on Death Act Transfer on Death Deeds operate as a quit claim deed from transferor to the beneficiaries (no warranties of title) While the transferor is alive, beneficiaries have NO INTEREST in the real property (thus beneficiaries cannot mortgage the property and their judgment liens do not attach)

57 Transfer on Death Deeds To be valid, the Transfer on Death Deed must: Contain the essential elements and formalities of a properly recorded inter vivos deed (comply with the title and recording standards) State in the body of the deed that the transfer to the designated beneficiary is to occur at the transferor s death Be recorded BEFORE the transferor s death with the local Register of Deeds Not be revoked by the transferor prior to death

58 Transfer on Death Deeds After the transferor has died, an Affidavit of Confirmation (with an included death certificate for the transferor) must be recorded with the Register of Deeds for record title to transfer to the beneficiaries Optional Statutory Forms can be found at SDCL 29A (Transfer on Death Deed Form), 431 (Revocation Form), and 432 (Affidavit of Confirmation)

59 Transfer on Death Deeds Title Insurance Considerations: Transfer on Death Deeds will always be shown as exceptions or notes on commitments since the transferor could pass away between the search date and closing If the transferor has died, an Affidavit of Confirmation will be required to be completed and recorded before record title shifts to the beneficiaries If the transferor is conveying their interest in the property to someone else, they must explicitly revoke their prior Transferor on Death Deed in either the conveying instrument or a separate instrument

60 Transfer on Death Deeds PRACTICE TIP even though this is a non-probate transfer, if no probate is filed for the transferor within 30-days of their death, there is a statutory presumption that the transferor s estate is insufficient to pay its debts Creditors, including DSS, can bring an action that adds the property at issue back to the transferor s estate (SDCL 29A through 426) Purchasers for value and lenders acquiring a security interest in the property take free of these claims unless they had actual knowledge that the estate was insufficient (SDCL 29A-6-425)

61 #9 Affidavit of Possession Marketable Record Title Act (SDCL 43-30) provides the statutory sword and shield of marketable title protection for property owners Any person who has color of title and a 23-year unbroken chain of title (including their predecessors in interest s time) shall be deemed to have marketable title free and clear of prior interests not controlled by a separate SOL (SDCL ) Purpose is to allow for record owners to extinguish ancient title claims and defects (Tvedt v. Bork, 414 N.W.2d 11, 13 (S.D. 1987)) by serving as curative act, a recording act, and as a statute of limitations (Springer v. Cahoy, 2013 S.D. 86)

62 Affidavit of Possession Springer v. Cahoy (2013) is the most recent and authoritative case from the South Dakota Supreme Court on the scope and impact of the Marketable Record Title Act Establishes that the recording functions of the Act put a burden on anyone seeking to claim an interest in the property at issue to record their claim during the 23-year time period to preserve it Failure to do so means that the claimed interest is BARRED by the Act (statute of limitations function)

63 Affidavit of Possession Notice of claims have to be recorded with the Register of Deeds in the county where the property is located and must be specific in terms of the claimed interest and the property at issue (SDCL and 5) Affidavits of Possession are used to establish of record that the property owner has had a sufficient unbroken chain of ownership for the required period of time and to terminate all prior interests that are not controlled by a longer SOL (SDCL )

64 Affidavit of Possession Affidavits of Possession cannot be recorded early (prior to 23-years) to cure defects May only record (obtain the benefits of) an Affidavit of Possession after the 23-year period has run Not all interests are terminated by Affidavits of Possession, including: Any interests not yet time-barred like mortgages, remainder interests, and leases (SDCL ) Rights and interests of the United States, the State of South Dakota, or their subdivisions (SDCL ) Rights and interests of public utilities and railroads (SDCL ) PRACTICE TIP if you are using an Affidavit of Possession in connection with clearing tax deed title, there must be at least 23- years from the recording pf the deed out from the County (date County no longer has an interest), not when the property was taken for failure to pay taxes (Title Standards 7-08 and 26-01)

65 #10 Quick Topics For probates, Letters of PR need to be recorded in all counties where the decedent owned property If there is a foreign probate and the decedent owned SD land, a SD probate will need to be commenced and Letters of PR issued locally because of jurisdiction issues If you are engaged as a qualified intermediary for an I.R.C Exchange, make sure you are not performing those services for any current or recent clients since you are disqualified for that role by the IRS and your client will have to pay the tax Remember that South Dakota qualified intermediaries are held to a professional negligence standard and have a duty to disclose potential issues related to the exchange (Kreisers v. First Dakota Title, 2014 S.D. 56) cannot just hold the money

66 Quick Topics Title Defects and How to Cure Them Some defects are cured by the passage of time, including: Defective notary acknowledgments after 10-years from the date of filing (SDCL and (3)) Lack of marital status of grantors after 20-years from date of recording (Title Standard 5-04 and SDCL (4)) Unsatisfied or unreleased mortgages become ineffective and void more than 15-years after the stated due date or 30-years from the date the mortgage was executed and recorded if no due date is listed (Title Standard 14-04) Only immaterial defects can be cured via an affidavit (Title Standard 7-09) including: Variances in name spellings or use (or non-use) of initials of any person appearing in the chain of title Establishing whether property was or was not homestead property for prior grantor(s) Clarifying the marital status of prior grantor(s) Explaining ambiguous recitals in instruments of record Material defects (incorrect grantors, legal descriptions, etc.) can only be fixed by new instruments that are properly executed, acknowledged, and recorded by the necessary parties Cannot be fixed by third-parties Judicial remedy for nearly all title issues involves a Quiet Title Action (or something similar) where all interested parties receiving proper service and the opportunity to be heard. Court order should state that title to the property is cleared of the defect, with the order recorded in the land record

67 Quick Topics Foreclosure Searches and Post-Judgment Title Work if an interested party was not properly served as part of the prior foreclosure, an exception for that unterminated interest will appear in future title work until the defect is cured Remember that statutory foreclosure actions terminate junior interests, deeds in lieu of foreclosure do not

68 KEY TAKEAWAY It is easier to address questions and concerns prior to closing transactions and recording instruments than after the fact Feel free to contact Eric Hanson and Chris Moran at Dakota Homestead Title Insurance Company ( ) with any real estate / title questions and we will assist as much as possible

69 YThe SOS on the POA: Don t Get Bit by the Wolf in Sheep s Clothing Bobbi L. Thury Legacy Law Firm, P.C.; Sioux Falls, SD Bobbi Thury is a shareholder at Legacy Law Firm, P.C., a boutique firm focusing exclusively in the areas of estate planning, elder law, and business planning. She graduated from the South Dakota School of Mines & Technology with a Bachelor of Science in Interdisciplinary Sciences, the University of South Dakota Beacom School of Business with a Master of Business Administration, and the University of South Dakota School of Law. Bobbi clerked for the South Dakota Second Judicial Circuit before entering private practice. Bobbi is admitted to the State Bars of South Dakota, Minnesota, and Iowa.

70 The SOS on the POA: Don t Get Bit by the Wolf in Sheep s Clothing Presented by Bobbi Thury

71 Financial Power of Attorney: Why have them? Business Owners and Company Directors are busy and stuff happens Ensures the day-to-day running of business runs smoothly in absence

72 Financial Power of Attorney: Why have them? POAs can keep decision making in the hands of your client Maintain control (versus judge or general state laws) POAs DO NOT remove rights from principal

73 Financial Power of Attorney: Why have them? Can Prevent Delays By having a designated attorney-in-fact, with guidelines in place, whether strict or broad, business decisions can be handled in a timely matter

74 Financial Power of Attorney: Why have them? Court Costs Time Costs Business Costs Emotional Costs

75 Understanding the Roles Principal Agent Relationship Principal is boss and agent is servant Agent cannot overrule principal Fiduciary capacity

76 Understanding the Roles Agent cannot overrule principal but ripe for abuse so Pick the right agent Multiple agents

77 Executing a Power of Attorney What s required for it to be signed in compliance with law? Capacity (SDCL ) Authority to enter into a contract required by law to be in writing can only be given by an instrument in writing (SDCL )

78 Executing a Power of Attorney SDCL : signed by the principal or in the principal s conscious presence by another individual directed by the principal to sign the principal's name signature must be witnessed by two other adult individuals or by a notary public

79 Digital Age Digital Powers Electronic Documents and Signatures

80 Durable versus Non-Durable If the POA does not have durability language, the POA will have no effect once the principal becomes incapacitated This could have an adverse effect on the principal s business interests since the principal will not have an agent to carry out business decisions on their behalf

81 Durable Power of Attorney SDCL : "This power of attorney shall not be affected by disability of the principal," or "This power of attorney shall become effective upon the disability of the principal," or similar words showing the intent that the power remains notwithstanding later disability or incapacity of the principal or later uncertainty as to whether or not the principal is dead or alive.

82 Termination SDCL : an agency is terminated as to every person having notice thereof by: (1) Revocation by the principal; (2) Death of the principal; or (3) His incapacity to contract.

83 General versus Limited SDCL : If authority is given partly in general and partly in specific terms no higher powers than those specifically mentioned are given

84 Limited POA Granting specific powers to specific individuals Business decisions can be granted to one individual, real estate to another, and so on Critical that the drafting is detailed and specific as to not cause confusion Clear guidelines for what power each agent has

85 General POA Advantage You will have an agent in place to make all your decisions for you, including business planning, financial, etc. Disadvantage Grants broad authority

86 Limited POA Advantage The principal is able to delegate specific decisionmaking responsibilities to individuals who have experience and knowledge in specific areas Disadvantage By granting specific powers, certain decision-making responsibilities may not be covered

87 Agent s Fiduciary Duties SDCL : An authority expressed in general terms, however broad, does not authorize an agent to do any act that a trustee is forbidden to do by the law on trusts or that an agent is forbidden to do by the law on fiduciary access to digital assets. SDCL through covers obligation of good faith; use of property for own benefit; fraud against beneficiary; interested party to transactions adverse to a beneficiary; comingling of assets; Trustee s influence not to be used for his advantage

88 Liability for Breach of Duties SDCL : Fraud against beneficiary of trust. Every violation of the provisions of to , inclusive, is a fraud against the beneficiary of the trust. SDCL : Presumption against trustee. All transactions between a trustee and his beneficiary during the existence of the trust or while the influence acquired by the trustee remains, by which he obtains any advantage from his beneficiary, are presumed to be entered into by the latter without sufficient consideration and under undue influence. Punitive Damages may be sought In re Discipline of Mattson, 2002 S.D. 112, 651 Nw2d 278 (S.D. 2002)

89 Ethical Considerations Conflict of Interest Are you representing the principal or agent? Capacity When it s too late, it is too late Knowing who it s okay to share information with and when

90 Business Considerations Principals can grant powers to agents to vote, execute buy-sell and operating agreements, approve the sale of major assets and major purchases, whistle blower powers, etc. This power can be limited by bylaws, operating agreements, partnership agreements, etc.

91 Business Considerations Knowing who to grant powers to: Your client may have a spouse or child who they trust handling their finances, but who knows little about the client s business Grant specific POA to spouse or child that includes all decisions except those pertaining to business Grant specific POA to a trusted advisor or business partner with knowledge of the business

92 Financial Power of Attorney Not all documents are created EQUAL

93 Drafting Considerations Durability Limited or General Power of Attorney Selecting Agent and backup Effective Date of Power Springing Immediate Hybrid

94 Drafting Considerations Exoneration Clause Benefiting Other People Clauses Compensation Clause

95 Third Party Considerations when Dealing with a POA Things to watch out for: Is the POA in effect? Is proper authority given in document? Is there too much dust on the POA and is there a duration reference?

96 Dealing with a POA? How should a power of attorney be signed? JOHN DOE by JANE DOE, his attorney-in-fact

97 Dealing with a POA? SDCL : A durable power of attorney that purports to be signed by the principal named in the durable power of attorney is presumed valid. Another person may rely on the presumption of validity unless the person has actual knowledge that the power was not validly executed or that the power was revoked.

98 Amanuensis Doctrine Estate of Bronson, 2017 S.D. 9 (March 23) where the name of a party is signed to an instrument in the presence of the party, and by his authority, and where he knows the contents of the same, the signature will be regarded as the signature of the party whose name purports to be signed to the instrument.

99 Revocation Watch Out! Revocation by operation of law (appointment of conservator SDCL ) Agency is terminated as to every person having notice of the principal s revocation, death of the principal or incapacity of the principal (SDCL ) Notice to third-parties rare Multiple original documents Verification of the document before each transaction initiated by the agent

100 Elder Law Considerations Baby Boomers & the Silver Tsunami More assets will be transferred now than ever before Business succession will be at an all-time high

101 Elder Law Considerations Business owners that are snow birds Can promote efficiency and prevent delays when health issues arise

102 Elder Law Considerations Principal having capacity Concerns with valid execution Concerns with effective date if springing SDCL : A conservatorship terminates a power of attorney and agent accounts to the conservator rather than to the principal

103 Elder Law Considerations Seniors face heightened concern for: Undue Influence Exploitation Legislative Changes in 2016 for Elder Abuse Prevention

104 Statutory Short-Form 2018 House bill 1204 was tabled Introduced a Statutory Short-form for Power of Attorney The bill has other proposed forms as well: Agent s Certification as to the Validity of Power of Attorney and Agent s Authority Statutory Form Revocation of Power of Attorney

105 Health Care Power of Attorney Principal appoints agent who will make health care decisions when principal cannot Must be durable May authorize attorney-in-fact to consent to, reject, or withdraw consent for health care, including any care, service or procedure to maintain, diagnose or treat a person s physical or mental condition However, all such decisions shall be made in accordance with accepted medical standards

106 Final Thoughts POA s can be an effective planning tool Language used is important Knowing who to appoint for what responsibilities is of the utmost importance Have your clients review their POAs every couple of years

107 Thank You! 7404 S. Bitterroot Place Sioux Falls, SD phone fax

108 2017 Tax Act Update James M. Jarding, Jr. Eide Bailly, LLP; Sioux Falls, SD Since 1992, Jim has been providing tax services to a variety of industries, including wholesale, retail, construc on and manufacturing. He primarily works with individuals and closely held businesses on income, tax and estate planning. When working with Jim, clients can expect an advisor they can trust. While many business owners and entrepreneurs are business savvy, Jim is happy to provide the financial exper se, giving clients one less task to worry about. With Eide Bailly's vast resources, Jim is confident he can find ways for his clients' businesses to become more profitable and financially savvy. Rivaling Jim's passion for serving clients is his interest in sports. As a dad, he's more of a spectator than a player these days, chasing his kids around to watch them play. Jim also enjoys the great outdoors and spends as much me as he can pheasant and deer hun ng. Together Jim's family enjoys boa ng on beau ful summer a ernoons, skiing, tubing and enjoy the water.

109 THE CURRENT STATE OF TAX REFORM

110 DISCLAIMER These materials, and the accompanying oral presentation, are for educational purposes only and are not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. This information is of a general nature and based on authorities that are subject to change.

111 INTRODUCTION

112 INTRODUCTION Largest Tax Act in 30 plus years. Headliner is Corporate tax rate cut. Significant individual changes. But also significant changes for businesses in the non-corporate form, including: sole proprietorships, S corporations, and partnerships. Generally referred to as flow-through entities. Still many unknowns and further guidance needed from Treasury/IRS. State tax considerations.

113 Priority Guidance Plan released February 7, 2018 lists 18 projects related to Tax Reform Interest limitations and carryforwards Sec. 199A 20% deduction for business income 100% bonus depreciation Accounting method changes for small businesses Executive compensation limitation Effect on estate and gift taxes of basic exclusion amount changes

114 OTHER SOURCES OF CLARIFICATIONS / CHANGES JCT Bluebook Technical Corrections

115 CORPORATE AND INDIVIDUAL TAX RATES

116 CORPORATE RATE CUT Flat 21% rate replaces current tiered rate structure, effective for tax years beginning after 12/31/17.

117 FISCAL YEAR CORPORATIONS Fiscal year ended Blended rate March 31, % June 30, % September 30, % December 31, %

118 2018 INDIVIDUAL RATES: JOINT FILERS

119 2018 INDIVIDUAL RATES: SINGLE FILERS

120 AMT Corporate: Repeals AMT

121 AMT Individuals: Retains AMT with $70,300 exemption ($109,400 joint) Exemption begins to phase out at $500,000 AGI, or $1 million for joint filers.

122 AUTOMATIC AMT? For 2017, AMT is almost unavoidable for AGIs from about $200,000 through $600,000. Starting in 2018, the higher phase-out levels will make AMT unlikely for most taxpayers without significant capital gains, tax credits, or some relatively unusual items.

123 KIDDIE TAX SIMPLIFIED Prior law required information from parent and sibling returns to report tax on income of dependents up to age 24. Act: kiddies are taxed at single rates, but unearned income is taxed using the estate and trust rate table, without the single standard deduction. This means a bigger exemption for earned income, but potentially higher taxes on other income.

124 NEW SECTION 199A- THE 20% PASS- THROUGH DEDUCTION

125 20% pass-through deduction (Sec. 199A) Sec. 199A provides deduction of 20% of qualified business income. For taxpayers with taxable income above the threshold amounts, the deduction can be limited. The deduction is available for trade or business income taxable on 1040s, whether from a Schedule K-1, Schedule C, Schedule E, or Schedule F. Sole Proprietors, Partners, S corporation shareholders all may qualify. Potentially applicable to both active and passive taxpayers.

126 ELIGIBLE INCOME Qualified business income is made up of income and expense items of a qualified trade or business during the year. It also includes qualified REIT dividends and qualified publicly-traded partnership income. A qualified trade or business excludes specified services, which are: any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees. This restriction doesn t apply when income is below a threshold amount, discussed later. Also doesn t apply to architects/engineers.

127 NON-QUALIFYING INCOME Qualifying income excludes: Capital gains and losses. Dividends (other than qualified REIT dividends). Interest, other than trade or business interest (financial institution interest income does qualify). Commodity gains, other than trade or business income. Non-hedging currency and derivative gains. Annuity income. Rental Income" not included in list of exclusions. No differing treatment of active and passive taxpayers? It appears that 1231 gains also do not qualify. The Conference Report says qualifying income does not include any item taken into account in determining net long-term capital gain or net long-term capital loss (Conference explanation, page 30).

128 LIMITS ON THE SEC. 199A DEDUCTION For taxpayers with taxable income above the threshold amounts, the deduction is limited to the greater of: 50% of W-2 wages included in trades or businesses of the taxpayers, or The sum of 25% of W-2 wages and 2.5% of the taxpayer s unadjusted basis in qualified property. Qualified property is depreciable property held by the business at the end of the taxable year whose depreciation life has not expired by the end of the taxable year. For this purpose, the depreciable life of the property is the property s regular tax life, but not less than 10 years. Unclear how limitation rules will apply to tiered structures or related entities with a common paymaster.

129 SPECIAL ELIGIBILITY AT LOWER INCOME LEVELS The restrictions on specified service income and W-2/Capital Base ceilings on the deduction are waived for income below threshold amounts. These are: Unmarried taxpayers and married separate filers: Adjusted taxable income of up to $157,500, phasing out over the next $50,000 of income. Joint filers: Adjusted taxable income up to $315,000, phasing out over the next $100,000. These income tests are applied at the individual level for partners and S corporation shareholders.

130 THE GRAIN GLITCH AND CO-OPS The deduction for 20% of qualified cooperative dividends originally enacted allowed farmers to exclude 20% of gross sales to cooperatives from gross income. As many farmers operate at less than a 20% margin in the first place, that was interesting. The Appropriations Act signed March 23rd changed this retroactively by re-installing the old Domestic Production Activities Deduction for agricultural co-ops. The result should bring grain co-ops into rough equivalence with non coop buyers, but will still favor more labor-intensive co-ops, such as those for fruit growers.

131 TRUST QUALIFICATION While estates and trusts were excluded from Sec. 199A benefits under the House and Senate bills, they do qualify for the deduction under the Act. This is a big deal for Electing Small Business Trusts owning S corporation stock. It also affects many family trusts owning inherited business and farm property.

132 REASONABLE COMPENSATION Anti-abuse provisions provide exclusion of reasonable compensation to the taxpayer for services rendered and partnership guaranteed payments from the reduced rate; enhanced penalties.

133 REASONABLE COMPENSATION This promises to be an area of contention and uncertainty: S corporation reasonable compensation has been the subject of IRS audit attention, as taxpayers minimize W-2 wages to reduce payroll tax. This raises the stakes for such exams. Partnership reasonable compensation through guaranteed payments is an area with almost no precedent or guidance. Will the IRS attempt to impose reasonable compensation on Schedule C and Schedule F filers?

134 OPEN QUESTIONS Business by business determination? Entity specific? Will services taint an otherwise qualifying business? Tracing through tiers of entities? How will flow-throughs report activities? Restructure now or wait?

135 OPEN QUESTIONS - EXAMPLE Scenarios to consider: QBI Business and Service Business each contribute 50% of revenue. QBI Business contributes 80% of revenue, Service Business 20%. Service Business Contributes 80% of revenue, QBI Business 20%. Questions: What if QBI Business and Service Business closely related. What if are separate lines of businesses. Business with QBI Service Business

136 NEW SECTION 199A- THE 20% DEDUCTION EXAMPLES

137 BASIC EXAMPLE Steve is a married business owner Business Income = $100,000 Taxable Income = $150,000 Qualified Business Income: $100,000 x 20% $ 20,000 Because taxable income is under threshold, wage limitation not applicable. Deduction is equal to 20% of QBI. Due to the $20,000 deduction, Steve is effectively paying tax on $80,000 of business income.

138 TAXABLE INCOME LIMITATION Steve is a married business owner Ordinary Business Income from K-1 = $100,000 Taxable Income = $76,000 Capital Gain Income = $0 20% of QBI Calculation Taxable Income Limitation Qualified Business Income: $100,000 Taxable Income: $76,000 QBI Deduction Rate: 20% Taxable Income Deduction Rate: 20% Tentative Deduction $20,000 20% of Taxable Income: $15,200 Deduction is limited to 20% of Taxable Income.

139 WAGE LIMITATION EXAMPLE Adam is a married taxpayer Wages = $50,000 Business income = $200,000 Depreciable Assets = $0 Taxable Income = $750,000 50% Wages 25% Wages / 2.5% of Basis 20% QBI: $50,000 $50,000 $200,000 50% 25% 20% $25,000 $12,500 $40,000 Analysis: Step #1: Take the greater of 50% of wages or 25% Wages/2.5% Assets ($25,000 >$12,500) Step #2: Take the lesser of 20% QBI or $25,000 Deduction = $25,000

140 ALLOCABLE WAGE EXAMPLE Adam is a married taxpayer 50% owner in a partnership Partnership Business income = $400,000 Depreciable Assets = $0 Wages Paid by Partnership = $200,000 Taxable Income = $750,000 50% Wage Calculation 25% Wages / 2.5% of Basis 20% QBI Calculation: Allocable Share of Wages: $100,000 $100,000 $200,000 % of Wages 50% 25% 20% $50,000 $25,000 $40,000 Analysis: Step #1: Take the greater of 50% of wages or 25% Wages/2.5% Assets ($50,000 >$25,000) Step #2: Take the lesser of 20% QBI or $50,000 Deduction = $40,000

141 SPECIFIED SERVICE PHASE-OUT EXAMPLE Adam is a single lawyer Business Income = $150,000 Taxable Income = $195,000 Analysis: Step #1: Specified service business with taxable income in excess of limitation subject to phase-out of deduction. Step #2: Calculate phase-out to determine limitation of deduction. Step #3: Reduce 20% of QBI by limitation.

142 SPECIFIED SERVICE PHASE-OUT EXAMPLE Calculate Limitation on Deduction Taxable Income: $195,000 Calculate the 199A Deduction Business Income: $150,000 Threshold: $157,500 Amount over Threshold: $37,500 QBI Deduction Rate: 20% TENTATIVE Deduction: $30,000 Total Phase-Out Range: $50,000 % Phased-Out 75% % of Deduction Allowed: 25% Limitation due to Phase-Out 25% Limited Deduction: $7,500 Taxpayer Limitation Range Married Filing Joint $315,000 - $415,000 All other Taxpayers $157,500 - $207,500

143 UNADJUSTED BASIS OF PROPERTY EXAMPLE Joy is a 33% owner in an LLC with rental properties Business Income of LLC = $300,000 Wage expense of LLC = $0 Unadjusted Basis of Assets in LLC = $600,000 Analysis: Step #1: Determine allocable share of income, wages & basis. LLC Total Allocable Share (33%)

144 UNADJUSTED BASIS OF PROPERTY EXAMPLE Step #2: Calculate QBI, wage and asset limitations: 50% of Wage Calculation Allocable Share of Wages: $0 Wage Reduction: 50% 50% of Wages: $0 25% wages / 2.5% of Assets Limitation Allocable Share of Assets: $200,000 Asset Rate: 2.5% 2.5% of Assets: $5,000 25% of Wages: $0 25% Wages + 2.5% of Assets: $5,000 20% of QBI Calculation Allocable Share of QBI: $100,000 QBI Deduction Rate: 20% Tentative Deduction: $20,000 Step #3: Determine 199A Deduction: A. Take the greater of 50% of wages or 25% Wages/2.5% Assets ($5,000 > $0). B. Take the lessor of 20% of QBI or $5,000. Deduction = $5,000

145 C CORPORATIONS PREFERRED FORM OF BUSINESS?

146 IS IT TIME TO RECONSIDER THE C CORPORATION? C corporations have fallen out of favor under the 1986 Code

147 ENTITY SELECTION/MODIFICATION OPPORTUNITIES 21% corporate rate vs. individual rate with 20% pass-through deduction. Double tax vs. single-tax. Availability of Sec exclusion.

148 WHY? THE C CORPORATION DOUBLE TAX S corporations and partnerships - earnings are taxed on owner returns currently. After-tax earnings can be distributed tax free. Earnings left in the entity increase owner basis, so they don t cause a tax on the sale of the entity. C corporation earnings are taxed to the corporation when earned. If earnings are distributed, they are taxed as dividends. If earnings are left in the corporation, they don t increase basis, so they are taxed to the extent the retained earnings have increased stock value.

149 PERSONAL HOLDING COMPANY TAX 20% tax on undistributed personal holding company income. Effect is to force distribution of investment income.

150 Accumulated Earnings Tax 20% tax on excess accumulated taxable income of C corporations.

151 C CORPORATION VS. PASS-THROUGH FACTORS INDICATING C CORPORATION NOL carryforwards. Profitability. Expected continuous growth. Long time horizon before sale or shareholder need for cash. Qualification for Sec FACTORS INDICATING PASS-THOUGH Sale likely in near-medium term. Desire for withdrawal of cash currently. Qualification for 199A deduction. Lack of C corporation factors. Lack of plausible use of accumulated earnings.

152 HOW THE SEC DEDUCTION WORKS

153 Use of the 1202 exclusion combined with a 21% corporate rate. Linkage between new section 199A and section 1202(e). Clear need for IRS guidance on what it means to have a qualifying business under section 1202.

154 POLITICAL RISKS

155 SUMMARY: THE FUTURE OF C CORPORATIONS Image by Hartmut Inerle under Creative Commons license

156 FULL EXPENSING QUALIFIED PROPERTY

157 BONUS DEPRECIATION

158 QUALIFIED PROPERTY Used property: Removal of the requirement that the original use of qualified property must commence with the taxpayer (i.e., allows the additional first-year depreciation deduction for new and used qualified property) Dealer property: Bonus depreciation is unavailable for many taxpayers eligible to deduct floor plan interest expense Rate-regulated utilities: Bonus depreciation unavailable for: Electrical energy or water; Sewage disposal services; Gas or steam through a local distribution system; or Transportation of gas or steam by pipeline

159 SECTION 179 DOLLAR LIMITS Sec. 179 Increases the maximum amount a taxpayer may expense under section 179 to $1,000,000, and the phase-out threshold amount to $2,500,000, for taxable years beginning after Indexes such amounts, as well as the $25,000 sport utility vehicle limitation, for inflation for taxable years beginning after 2018.

160 SECTION 179 ADDITIONAL QUALIFYING PROPERTY Roofs Heating, venting, and air conditioning Fire protection and alarms Security systems Exclusion for property used in connection with lodging repealed

161 CHANGES IN DEPRECIATION LIVES AND METHODS Intended to make qualified improvement property subject to a 15-year life / bonus an oops by Congress leaves at 39 years (for now?). Qualified leasehold, qualified retail, and qualified restaurant property eliminated AFTER 12/31/17. Farm property equipment (with the exception of grain bins, cotton ginning assets, and fences) placed in service after 12/31/17 are now 5-year assets eligible for 200% DB instead of 7-year with 150% DB.

162 INTERNATIONAL TAXATION

163 THE NEW TERRITORIAL SYSTEM Territorial tax implemented by a 100% dividends received deduction by US corporations from foreign corporations. Post 1986 earnings of controlled foreign corporations will be taxed at 15.5% to the extent of foreign cash equivalent assets. Other foreign earnings will be taxed at 8%. The US shareholder may elect to defer the tax over eight years. If the US shareholder is an S corporation, the shareholders will be allowed to make the election. Other provisions impose excise taxes for items like payments for intellectual property.

164 LOST OR LIMITED BUSINESS DEDUCTIONS

165 LOST, LIMITED DEDUCTIONS Lost or limited deductions: Business Interest expense Excess business losses Net operating losses Executive compensation Entertainment expenses Transportation fringes Research expenditures / credits

166 BUSINESS INTEREST DEDUCTION LIMITS Limits interest deduction to the sum of (i) the business interest income of the taxpayer for the taxable year, (ii) 30 percent of the adjusted taxable income of the taxpayer for the taxable year, and (iii) the floor plan financing interest of the taxpayer for the taxable year. Defines adjusted taxable income by starting with taxable income without regard to non-business items, interest, and NOLs. For , adjusted taxable income is computed without regards to depreciation, amortization and depletion. After 2021, adjusted taxable income includes depreciation, amortization and depletion deductions. The 20% Sec. 199A deduction is ignored. A special rule allows a deduction of interest for floor-plan financing. Excess interest is deferred and added to subsequent year computations.

167 BUSINESS INTEREST DEDUCTION LIMITS These rules do not apply to businesses with annual gross receipts under $25 million. Application to Partnerships: Limitation first determined at partnership level and allowed items taken into account when determining partnership income/loss. Items not allowed at partnership level flow through to partners as separately stated items, partners carry forward to future year. Application to S corporations: Entity level disallowance, carried forward to future year.

168 BUSINESS LOSS LIMITS Restricts current use of excess business losses of individuals to $250,000 ($500,000 on joint returns) starting in 2018.

169 BUSINESS LOSS LIMIT EXAMPLE Calculation of Business Loss Limitation Excess business loss of $250,000 carried forward to future years as a Net Operating Loss.

170 BUSINESS LOSS LIMITS Excess losses carried forward as part of taxpayer s NOL. For S corporations and partnerships, limitation applied at individual level. Limitation applied after section 469 passive activity rules. Effect is to limit ability of taxpayers (other than corporations) to deduct business losses in excess of $250k/$500k against wages, investment income, and other income.

171 NET OPERATING LOSS CARRYBACKS Eliminates NOL carrybacks, with exceptions: Allows a two-year carryback in the case of certain disaster losses incurred in the trade or business of farming.

172 NET OPERATING LOSS CARRYFORWARDS Limits deduction for NOLS arising after 2017 to 80% of taxable income in the carryforward years.

173 EXECUTIVE COMPENSATION Expands the $1 million deduction limit on compensation paid to top executives of publicly held companies after The exception for performance-based goals is eliminated. Definition of covered employees expanded to include all executives whose compensation must be reported to shareholders and CFOs. If you are ever a covered employee after 2016, you are always a covered employee. Transition rule for performance-based agreements in place on November 2, 2017.

174 EXECUTIVE COMPENSATION EXEMPT ORGS 21% excise tax on compensation in excess of $1 million per person paid to an organization s top five compensated employees and former employees. An exception to this rule exists for compensation paid to qualified medical professionals attributable to medical services they provide to the organization.

175 ENTERTAINMENT EXPENSES Eliminates deductions for business entertainment and for dues for clubs organized for business, pleasure, recreation or other social purposes. Review employee reimbursement policies. Set up accounts to capture limited amounts. Employee achievement awards may not be deducted or excluded from employee s income if the award is paid in cash, gift cards, meals, lodging, tickets, securities or similar items. Employer provided eating facilities will be subject to the 50% deduction limitation; after 2025 deductions are completely disallowed for employer-provided eating facilities and meals provided for the convenience of the employer.

176 QUALIFIED TRANSPORTATION FRINGES Act disallows a deduction for expenses or employee reimbursements related to qualified transportation fringe benefits. Commuting expenses are not deductible except to ensure the safety of the employee. Examples employee buses, van pools, transit cards and qualified parking fees. Review policies for employee transportation benefits.

177 RESEARCH EXPENSES AND CREDITS While the research credit is retained, research expenses paid or incurred after 2021 will be amortized rather than deducted currently. Rehabilitation Credit - 20% credit for certified historic structures claimed ratably over a five year period. Work Opportunity Tax Credit, New Markets Tax Credit, and Low-Income Housing Tax Credit retained.

178 ACCOUNTING METHODS

179 CASH METHOD EXPANSION Increases the current $5 million gross receipts limit for cash-basis taxpayers to $25 million.

180 INVENTORY AND SECTION 263A SMALL ENTITY EXCLUSION / COMPLETED CONTRACT METHOD Allows small entities to either treat inventories as supplies or treat them under their financial statement method, and exclude them from the Sec. 263A inventory capitalization rules. These rules apply to businesses with gross receipts under $25 million. The $10 million average annual gross receipts threshold for use of the completed contract method is also increased to $25 million. The change is considered an accounting method change approved by the IRS. Effective for years beginning after 12/31/17.

181 NEW INCOME DEFERRAL RESTRICTIONS Accrual basis taxpayer with applicable financial statement can t defer income beyond date recognized for financial statement purposes. Sec. 451(b). Applicable financial statements include (in order) 10-K filings. Audited financials used for credit, user reporting, or any other substantial non-tax purpose. Federal agency filings for non-tax purposes. Conference committee report says installment and long-term contract methods still apply. Effective starting in 2018.

182 LIKE-KIND EXCHANGES Limits like kind exchanges to real property for post- 12/31/17 exchanges. A transition rule applies to deferred or reverse exchanges started before 12/31.

183 LOST, LIMITED OR REVISED PERSONAL DEDUCTIONS

184 Standard deductions Medical expenses State and local taxes Lost, limited or revised deductions: Personal Home mortgage interest Charitable donations Casualty and theft losses Miscellaneous 2% deductions Phase out of itemized deductions Child tax credit Alimony Moving expenses

185 STANDARD DEDUCTIONS Increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals. Indexes the standard deduction for inflation using the C-CPI-U for taxable years beginning after December 31, 2018.

186 MEDICAL EXPENSES While the House bill would have repealed the deduction, the Act retains it and lowers the AGI floor from the current 10% to 7.5% for 2017 and 2018.

187 STATE AND LOCAL TAXES Repeals the itemized deduction for state and local taxes, effective after 2017, with the exception of a $10,000 annual allowance. The allowance allows a maximum $10,000 deduction for state and local non-business property and income taxes, or, at the taxpayer s option, property and sales taxes. Same $10,000 limit for joint filers and single taxpayers.

188 State efforts to address $10,000 cap on state and local tax deductions.

189 PROPOSALS Replacing income taxes with payroll taxes. (CT and NY) Creating a tax credit for contributions. (CA, IL, MD, NE, NJ, NY, VA, WA) Sales tax on professional services to high income clients and a 10% windfall profits tax. (CA)

190 HOME MORTGAGE INTEREST Deduction limited to interest on $750,000 principal on new home acquisition debt incurred after 12/15/17. Home equity debt interest deduction suspended from 2018 through 2025.

191 CHARITABLE GIFTS Cash contribution ceiling raised to 60% of AGI. Charitable deduction for contributions to colleges for seating rights eliminated. The increase in the standard deduction will greatly reduce the number of people who itemize their deductions. Tax planning ideas: Bunch charitable contributions for two years into one year to exceed the standard deduction every other year. Set up a donor advised fund. This will be an interesting case of behavioral economics to see if the tax deductibility will affect charitable giving.

192 CASUALTY AND THEFT LOSSES Repeals the deduction after 2017 except for Presidentiallydeclared disasters.

193 MISCELLANEOUS DEDUCTIONS Repeals deductions for tax preparation fees and unreimbursed employee business expenses. Also repeals the deduction for expenses for the production or collection of income, as well as other deductions subject to the 2% floor. Sunsets these disallowances after 2025.

194 PHASE-OUT OF ITEMIZED DEDUCTIONS, PERSONAL EXEMPTIONS Gone

195 CHILD TAX CREDIT Old law: Credit of $1,000 for qualifying children under 17. Phased out starting at $110,000 for joint filers, $75,000 for single filers. Refundable to lesser of full amount or 15% of earned income exceeding $3,000. Act: $2,000 credit. Phased out starting at $400,000 for joint filers, $200,000 otherwise. First $1,400 is refundable to extent of 15% of earned income over $2,500. Child s Social Security number required to claim credit. Effective:

196 ALIMONY Old Law: Alimony is deductible to payor and includible in recipient income. Act: Alimony is neither deductible nor includible. Effective date: New law applies to divorce or separation instruments executed or modified after December 31, 2018 Recent headline in ABA Journal: New Law Affects Alimony Could Spur Divorce Surge!

197 MOVING EXPENSE EXCLUSION Moving expense deduction/exclusion Repealed after 2017 except for members of armed forces.

198 ESTATE TAX AND PLANNING IMPLICATIONS

199 ESTATE TAX 2017 Tax Cuts and Jobs Act 40% rate Exemption estimated to be 11.18M indexed ($5.6 M prior to enactment) Increased Exemption available for gift, estate and GST Portability Increased Exemption set to sunset back to 2018 rates January 1, Annual Exclusion estimated to be $15,000 per person

200 TRUST INCOME TAX UPDATES 2018 Estates and Trusts Income Tax Rates Not over $2,550 If taxable income is: 10% of taxable income The tax is: Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550 Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150 Over $12,500 $3, plus 37% of the excess over $12,500 The new tax rates are scheduled to expire after 12/31/2025.

201 TRUST INCOME TAX UPDATES Deductions for state income taxes and real estate taxes will be limited to $10,000 (same limitation as individual taxpayers). Miscellaneous itemized deductions will be disallowed. Administration expenses incurred by an estate/trust are still deducted. These would include fiduciary fees, legal fees, tax preparation fees, etc. Estates and trusts are able to take advantage of the 20% deduction for qualified business income. Net operating losses can no longer be carried back. The losses can only be carried forward indefinitely. Net operating losses can only offset 80% of taxable income in carryover years.

202 PORTABILITY No change with Tax Reform. The first spouse to pass-away can now pass his/her exemption amount to the surviving spouse without complex estate planning.

203 PLANNING WITH PORTABILITY Planning has become more complex: Large exemption amount ($11.18 million) Portability Income tax considerations Consider sunset provisions $5.6 million indexed in 2026 Benefits of Estate tax Inclusion at the second death to obtain a second step-up in basis.

204 PLANNING FOR MID-SIZE ESTATES Consider new options if you currently have one of the prior planning techniques known as: Credit Trust/Marital Trust. Family Trust/Marital Trust. A-B Trust. May want to consider: Disclaimer Trust Qualified Terminable Interest Property Trust (QTIP) Techniques that leave options on the table at death of first spouse

205 ESTATE PLANNING WITH TRUSTS Separate Trust for Children vs. Pot Trust Separate Trusts will allow for additional $10,000 annual allowance for real estate and state income taxes Possible opportunity for additional 199A thresholds Still waiting for determination if 199A is considered before or after distribution to beneficiaries

206 IRREVOCABLE LIFE INSURANCE TRUSTS - ILIT Trust created to hold life insurance policies. Gifts of cash made to the trust to cover the insurance premiums. Proceeds of the policy owned outside of the taxable estate. Is ILIT needed after 2017 Tax Reform? Consider terms of the trust. How would proceeds come out of trust. Can revisions be made to the trust. Alternatives with the policy.

207 SUNSET CONSIDERATIONS FOR GIFTING If exemption is used during life, taxpayer uses the bottom threshold first. To take advantage of the increased exemption one must gift over the Sunset amount of 5.6 M.

208 SUNSET CONSIDERATIONS FOR GIFTING CLAWBACK Exemption used during life used at higher level Death after exemption sunsets Question - Can tax be assessed on the difference of lower exemption and previous higher exemption Regulations to be issued to clarify

209 CHARITABLE GIFTING With increase in standard deduction may consider other charitable gift opportunities Gift of farm commodities or raised livestock Gift of unsold inventory Qualified charitable distributions from IRA

210 PLANNING WITH INCREASED EXEMPTION Great opportunity for taxpayers over the exemption: Exemption increased for estate, gift and GST exemptions With the large exemption, may want to make use of GST funding techniques Weigh future appreciation and stepped up basis on death Gifts to grantor trusts, and leveraging grantor trusts with loans or sales from the grantor Forgiveness of outstanding loans to children Equalizing gifts to children or grandchildren Spousal access trusts may allow cash flow to remain with marital unit

211 PLANNING WITH INCREASED EXEMPTION If taxpayer now under exemption threshold should steps be considered to undo prior gift techniques? Be sure you are not undoing something that you may need in place if the exemption sunsets to 5.6M. Desire for 2nd step-up in basis may take precedence over estate exclusion Weigh income tax benefit versus estate tax benefit

212 PLANNING WITH INCREASED EXEMPTION Steps to consider to unwind prior estate planning: Revise control documents for closely held business entities to lower discounts Unwinding Family Limited Partnerships or LLC entities where discounting not needed if creator dies May consider creator receiving original asset (low basis) in return for partnership interests and the younger generation receiving other assets (high basis) Decant irrevocable trusts to include provisions that cause inclusion in primary beneficiary s estate

213 GIFTING TECHNIQUES Grantor retained annuity trust (GRAT). Sale to grantor trust (IDGT). Allows transfer during life without triggering capital gain Allows cash flow to grantor Freezing technique for estate tax purposes

214 LESSONS LEARNED Consider the sunset provisions. Plan for the laws we know currently. Provide flexibility in planning documents. The best plan provides options for tax planning at death.

215 OTHER ITEMS

216 529 PLAN CHANGES 529 plans are used to fund qualified higher education expenses. Qualified expenses include tuition, fees, books, etc. Change: Qualified higher education expenses now include tuition for enrollment or attendance at elementary or secondary public, private or religious school. Distributions are limited to $10,000 per beneficiary per year. Limitation is not by account but by beneficiary.

217 LOCAL LOBBYING Expenses for lobbying before local government bodies - deduction eliminated for amounts paid or incurred after 12/22/17.

218 CARRIED INTEREST New section Applicable partnership interest subject to new rules- must hold interest for 3 years to gain long term capital gain benefits. Appears assets inside partnership must also be held for 3 years. Applicable partnership interest is an interest received for substantial services in an applicable trade or business, does not include a capital interest.

219 CARRIED INTEREST Applicable trade or business Raising or returning capital, and either: investing in or disposing of specified assets (or identifying such specified assets for investing or disposition) or developing specified assets.

220 CARRIED INTEREST Specified assets Securities and Commodities Real estate held for rental or investment Cash/cash equivalents Options or derivative contracts with respect to the above assets, or An interest in a partnership to the extent of the partnership s interest in the assets listed above New section 1061 applies to gain generated under sections 1222(3)/(4) (long term capital gain), except using 3 years in lieu of 1 year. Section 1231 gains?

221 PARTNERSHIP TECHNICAL TERMINATIONS Partnerships will no longer terminate when there is a sale or exchange of 50% or more of interests in the partnership. Effective: years beginning after 2017.

222 INDIVIDUAL MANDATE REPEALED Repeals the individual mandate under the ACA, effective in 2019.

223 UNRELATED BUSINESS INCOME - EXEMPT ORGS Those organizations that are taxed as corporations will see their rate decrease to 21% and net operating losses limited to an 80% offset. The calculation of unrelated business income has been changed to no longer allow for the aggregation of income and losses from multiple business activities. Losses from one unrelated trade or business will only be available to offset income from that activity in the future. Change is effective for tax years beginning after December 31, 2017.

224 Entity choice review and modeling. Monitor state changes in response to federal tax reform. Monitor future guidance. Plan for limit on deductibility of interest expense and business losses. Review possible action steps Accounting method reviews - cash basis, completed contract method, etc. if under $25 million. Consider 20% deduction for QBI and possible limitations. Asset expensing issues cost segregation studies.

225 QUESTIONS? This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general information purposes only. Viewers are urged not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.

226 EIDE BAILLY INSIGHTS Tax Reform: Impact on Individuals Tax Reform: Impact on Businesses Tax Reform: Impact on Exempt Organizations Tax Reform: Depreciation Impact Tax Reform Created Significant Opportunities Involving Accounting Method Planning Tax Reform: Impact on Expenses for Entertainment, Meals and Employee Transportation Tax Reform: What Does it Mean for My International Business Eide Like a Clearer Picture of Tax Reform View recorded webinars and tax reform website on this webpage.

227 THANK YOU Jim Jarding, CPA Tax Partner